Customers buy products and services to fulfil a need (Winer & Dhar, 2011). There are various factors that influence a customer’s decision to buy a product (Sharma, 2014). Firms have used these factors to create competing philosophies to develop marketing activities (Lamb et al., 2008). Among marketing philosophies, the automotive industry focuses more on products, consumers and relationship marketing orientation. Winer and Dhar (2011) suggest that firms operating under product orientation believe that they’ll be successful if they produce superior quality products versus the customer orientation that focuses on satisfying the customer’s needs. With the relationship marketing orientation, the firm builds business relationships with its customers by providing value proposition and customer satisfaction on a regular basis (Winer & Dhar, 2011). According to Hough, et al. (2010) there are five competitive strategies companies use to position themselves in the market place, namely: low cost provider, broad differentiation, best cost provider, niche market strategy based on low cost and niche market strategy based on differentiation.
Figure 9: Influences on the consumer purchase decision process (McGraw-Hill Companies 2003)
21 Global markets have allowed international customers to trade. Manufacturers and suppliers that can produce and supply cheaper products use their absolute advantages to produce efficiently and effectively (Schiller, 2011). Producers that specialise in manufacturing certain products can offer it to the international market which will increase their output utilizing their economies of scale. Bilateral trade between South Africa and China has grown significantly. This has made China, South Africa’s number one exporter ahead of Germany in 2009 (Edwards & Jenkins, 2013). There has been an increased import of Chinese manufactured products entering the South African market, an occurrence which has been associated with reduced prices compared to local producers (Edwards & Jenkins, 2015).
With the current decline in economic activities in South Africa, consumers look for alternative cheaper products to satisfy their needs. According to the South African Reserve Bank (SARB, 2015), total house hold debt ratio increased from 8.8% in 2013 to 9% in 2014 and the growth of total salaries and wages decreased from 9.3% in 2013 to 7.6% in 2014.
Consumer spending has thus declined which makes customers look for value add when purchasing products.
Sales of Volkswagen and Hyundai have increased thus closing the gap to the Toyota units in operations. According to Lightstone Auto (2015), Toyota is still a leading brand with 23% of market share compared to Volkswagen (VW) with 14% of the 8.9 million vehicles in the South African market. There has been an increase in smaller passenger segments two years ago due to automakers targeting low cost providers or best cost providers. The majority of the Toyota, VW and Hyundai sales have been attributed to the smaller passenger segment. Although the automotive market has not expanded as desired, car makers have increased their incentives on new vehicles. These include additional features, extended warranties and service plans.
There has been a huge cost down drive on OES replacement parts from some of the automakers. Audi and VW have started advertising their genuine OES products in the aftermarket magazines like Automotive Business Review (ABR) to attract lost customers to Goldwagen. These are parts used mostly in vehicles that are out of warranty and motor plan.
This indicates that they have come to the realisation that lost sales can be attributed to the high cost of OES products during the four year period. The independent aftermarket retail
22 parts suppliers like Midas will provide alternative solutions on vehicles over four years old.
There is a significant price gap between the OES parts and the IAM replacement parts. Below is the market prices of the Hilux IMV evaporator comparing OES to IAM replacement parts.
Most intermediaries opt for a low cost provider strategy that will enable them to provide goods that will satisfy the needs of the customers.
Table 3: SA market prices of replacement parts (OES and IAM) (Dunair Market Research, 2015).
2.4.1. Socio-Economic Factors – Human Capital
Companies’ sourcing strategies rely purely on the capabilities of the suppliers to utilize the factor of production to manufacture desired products. Absorption capabilities on the other hand, address the abilities of the human capital to learn new skills and technology advancements to increase their competitiveness. Skills developments of employees have been the major contributor in the sustainable growth of organizations (Lang, Loeser, &
Nettesheim, 2008). The South African government has also emphasized the importance of investing in human capital by adding to the BBEE scorecard. With good corporate governance, it is imperative that organizations take care of their environment and their stakeholders especially their employees. The manufacturing industry has partnered with the Manufacturing, Engineering and Related Service Sector Education and Training Authority
Hilux IMV
Evaporator
Purchase price (ZAR)
Pats Distributor Repair Shop End user
Toyota Dealership R3481(10-15% discount of repair shop price)
R4003 R4642
Air Auto (Direct Importer)
R650 R850
23 (MerSETA) to drive the skills development initiative within its five chambers (Comrie et al., 2013), namely:
o Metal and engineering o Auto manufacturing
o Motor retail and component manufacturing o Tyre manufacturing
o Plastics industries
Unemployment and the low skills level of the youth is the biggest problem facing the South African economy. South Africa has an unemployment rate of 26.4 % with 65% of this being the youth between 15 and 36 years of age (StatsSA, 2014). Over 25% of production workers in the automotive industry have a high school education and under 3% are artisans and professionals combined (Barnes & Meadows, 2008). Comrie et al. (2013) concur with this stating that the qualifications of many employees, which are equivalent to grade 12, and are at the operator’s level, are no longer sufficient to sustain the industry. Comrie et al.(2013) further state that the modern production, supply chain methods and advanced manufacturing processes require employees to be numerate and literate. COSATU (2011) also emphasised the high level of skills shortage in South Africa as an absolute and relative. The shortage of skilled engineers, electricians, and specialist managers among others create a skills gap which countries like China have a competitive advantage in, particularly in R&D. Ambe (2014) also addresses the skills shortage, particularly the shortage of qualified engineers, as the major problem on R&D in South Africa.
Firms utilize marginal physical product and marginal revenue product when assessing their labour efficiencies (Schiller, 2011). These factors measure the change in total production when an additional employee is hired and the total revenue generated by that employee respectively. Therefore, the derived demand of labour will depend on the market wage rate and the amount of production output. Living wage has been the topic of discussions between employers and labour unions. The wage negotiations between labour and the sector are becoming more and more complex which makes them lengthy and result in industrial actions. Comrie et al. (2013) stress that the effect of these strikes filter down the supply chain
24 and affect tier suppliers drastically. In addition, the impact of strikes in the government’s economy has been largely negative with the reduction of tax revenues from both employees and firms in the drop of the country’s GDP. Loss of production and revenues by the OEM’s might affect them in obtaining future business.
In a South African Radio station SA FM interview with Thapelo Molapo, the Human Resources Vice President of Toyota South Africa Motors (TSAM) on Monday the 26th 2013, he stated that OEM’s were losing up to R600 million on revenue per day. Komo, et al., (2014) also stressed the effect of strikes in the industry with a 75% drop in vehicle production in the last quarter of 2013. This has decreased the level of business confidence in South African companies, which has equally demotivated global investors from injecting capital in its market. The output and sales of the firm depends on the resources required to produce (Schiller, 2011). The decline of capital investment reduces expenditure on factors of production, meaning labour which results in job losses. Schiller (2011) further explains that the increased wages in unionized labour markets can have a negative impact on the increased market supply of labour versus demand. Most localization programmes benefit host countries in terms of capital and technology, while the low business confidence level reduces Foreign Direct Investments (FDI) causing automotive manufacturers to look for alternative suppliers in the global market.
Remuneration of employees in South Africa’s manufacturing sector is extremely high as compared to other developing countries. According to Comrie et al. ( 2013), SA employees earn between 173% and 222% more compared to their Indian counterparts and approximately 70% more than counterparts in Thailand, Vietnam and Cambodia. These wage cost disparities and increased freight charges contribute to a high cost of products that make it difficult for South African manufacturers to compete in the global market.
25 Figure 10: Comparison of hourly wages in the manufacturing industry, including forecast to 2015 (South African Trade Policy and the Future Global Trading Environment, (2012)